The New York State Legislature voted to give thousands of homeowners facing foreclosure a second chance to fight for a deal to save their homes as it rushed towards its summer recess in June.

The second-chance provision (p.33, lines 26-49) was the product of deals hammered out in the final days and hours of the session by the three men in a room: Governor Andrew Cuomo, Senate Majority Leader John Flanagan and Assembly Speaker Carl Heastie. The second-chance legislation was tucked into a 44-page bill, which was a part of a larger piece of legislation, dubbed as the “Big Ugly,” which addressed numerous topics, including ethics legislation and control of public schools in New York City. The omnibus 44-page bill, which also dealt with dozens of topics, took second place, with many legislators and staffers referring to it as the “Little Ugly.” Both the Assembly and the Senate passed the “Little Ugly” on June 17.

Six days later, on June 23, Governor Cuomo signed the measure, and it officially became known as Chapter 73 of the Laws of 2016.

The second-chance law was vitally important to homeowners, who, unable to meet their mortgage payments, were left to their own devices to fight lenders’ lawsuits to take back their homes. Failure to attend to legal niceties came with disastrous consequences: an inability to raise any defenses to lenders’ demands for the surrender of their homes. The problem was seriously aggravated by an iron rule handed down by an appeals court in Brooklyn. The second-chance amendment overrode the Appellate Division, Second Department’s rule.

The legal nicety, which stymied homeowners, was a requirement that homeowners file a legal document, called an “answer,” within 30 days of receiving the lenders’ foreclosure papers. Failure to do so meant that the homeowner was in “default,” a status that precluded the homeowner from mounting any defense.

The enormity of the problem is apparent from statistics cited by the New York State Office of Court Administration (OCA) in its 2010 report. According to that report (p.8), prior to the state’s passage in 2008 of a law requiring good-faith negotiations to determine whether homeowners monthly mortgage payments could be lowered, nearly 90 percent of homeowners failed to file answers. By way of contrast, the report noted that, after enactment of the mandatory conferencing law, 80 percent of homeowners showed up for the court-supervised settlement conferences required by the 2008 law.

But, showing up for a settlement conference had no bearing upon whether there would be relief from the default. That meant that, if the homeowner and lender could not work out a modification, the homeowner was without redress in opposing foreclosure. That was often the case as illustrated by the $26 billion settlement wrested from five of the nation’s largest banks in 2012 for failing to comply with federal protocols for determining when a modification is in order and, if so, how much.

According to the latest statistics available from OCA, there were more than 100,00 settlement conferences held in the 12-month period that ended in October 2014. All but 11,800 homeowners responded to notices that they could avail themselves of the opportunity to seek a loan modification, which reflected a response rate of 88 percent.

But applying the 10 percent rate at which “answers” were filed prior to the adoption of the good-faith law, as noted in the 2010 report (p.8), more than 89,000 homeowners statewide were in default during the 12 months ending in October 2015 (2015 Report, p.9) and without any ability to oppose foreclosure upon their homes should the “good faith” negotiation fail to pan out.

A veteran foreclosure lawyer, Lynn Armentrout, provided a graphic description of the minefield posed by the requirement that homeowners file an answer in an article published in the New York Law Journal[1] in March of this year.

She cited the example of an architect, who was facing foreclosure because of the steep decline in his business as a result of the Great Recession of 2007-8. When asked whether he had filed an answer, the architect asked, “What do you mean, by serve an answer?…I have no idea how to do that. But I did call the attorney [for the lender] whose name is on the summons.” By the time, the architect had found his way to Armentrout, who worked with a New York City Bar Association project offering free legal services to persons facing foreclosure, the architect was already in default and at the mercy of the lender if a modification could not be agreed to.

Armentrout noted that she had “scores” of similar conversations with other clients over the years, adding that she was using the illustration of the architect to demonstrate that “it is not just the uneducated or unsophisticated, who are stymied by the notion of preparing a legal pleading.”

Armentrout, who is a now deputy director of housing at South Brooklyn Legal Services, also laid out her legal research demonstrating how the Appellate Division, Second Department’s approach to defaults imposes a strait jacket upon owners’ ability to fight foreclosures. Her research found that, with one exception (law office failure), the Second Department has refused to relieve homeowners of the consequences of their defaults. Even more telling, she reported that the Brooklyn based-court “routinely” reverses lower court orders granting homeowners relief from their default. Her research found 13 examples of such rulings as of the date her article was published on March 16, 2016.

Once in default, homeowners lost the right to assert their defenses to foreclosure under the Second Department’s rule. The amended law allows homeowners a chance to answer the complaint during the settlement conference process, and to assert any defenses that would otherwise have been barred because of their initial default.

Likewise, homeowners, on their second chance, can require lenders to prove that they own the homeowner’s mortgage loan. Previously, once a homeowner was in default, lenders were not even obligated to prove facts essential to their cases, such as their ownership of the loan.

The Second Department’s rulings are particularly important in the field of foreclosure law because four of the counties it covers —Suffolk, Nassau, Queens and Brooklyn—consistently have, by far, the highest foreclosure caseloads in the state. According to OCA, as of the end of May, those four counties accounted for nearly two-thirds of all foreclosure cases pending in the state.

Other positive changes for homeowners enacted as a part of the “Little Ugly:”

Spelled out lender behavior (p.32, lines 17-39)which could lead to a finding of an absence of good faith, including failure to comply with “court orders and directives” issued either by judges or the special referees designated to preside over the good faith conferencing process; engaging in unreasonable delay; and failure to provide accurate information to the court and parties.

Housing lawyers, present in Albany at the end of the session, credited “tireless work” by Assemblywoman Helene Weinstein, chair of the Assembly’s Standing Committee on the Judiciary, and her counsel, Nadia Gareeb, with spearheading the effort to enact the changes discussed in this article.

Specifically, the advocates said that Weinstein had sponsored a bill, which was passed by the Assembly in May that contained many of the protections included in the Little Ugly package.

The advocates also praised the New York State Department of Financial Services for formulating a bill, which incorporated many of the protections that survived the legislative deal-making process. They also credited Governor Andrew Cuomo’s office as being instrumental in pushing for the changes.

Representative Annette Robinson, the head the Assembly Banking Committee, credited the New York State Foreclosure Defense Bar, whose members made three trips to Albany during the legislative session, with moving the second-chance measure forward by providing “very specific and vivid examples of how owners were losing their homes because of the sloppy and nitpicking way in which lenders dealt with requests for loan modifications.”

In response to my question as to whether OCA was involved in the adoption of the new protections, OCA spokesman Lucien Chalfin responded, “While we were not directly involved with the passage of the legislation, we are familiar with its provisions and will make it work.”

[1] The content of the Law Journal is published exclusively in NEXIS and cannot be linked to.